I'm Political Economy editor at Forbes, editor of RealClearMarkets.com, plus a senior economic advisor to Toreador Research & Trading. I have book on how the economy works, Popular Economics: What LeBron James, the Rolling Stones and Downton Abbey Can Teach You About Economics that is set for release in April of 2015. I have a weekly column on Mondays at Forbes.com.

UBER, The Brilliant Car Service, Correctly "Gouges" Its Customers On New Year's Eve

Though an always politically correct media and political class are loath to admit it, well-run businesses serve the interests of their customers best when they adjust pricing to market realities. Put more simply, well run, customer-focused businesses “gouge” those same customers when demand outstrips supply.

For the readers not familiar with it, UBER is a car service accessible as an “App” on Apple products. Those who sign up (UBER serves a growing number of large cities) can request a car from their iPhone or iPad, through the UBER App their whereabouts will be made known to the drivers who are part of the UBER network, customers will then be told how long it will take for a car to arrive, and then a car (each time for me it’s been a brand new, well appointed Lincoln Town Car) will soon arrive to collect the customer before dropping that same customer off at a requested destination.

The process is too easy, and even better for customers, it’s cashless. When individuals sign up for UBER they enter a credit card at which point their card is charged once they use the service. No tipping, and even better, no negotiating with the UBER driver. Everyone in advance has a good sense of the price, and as a result it’s a very hassle-free process. UBER makes getting around much easier; evidence supporting the latter claim the rapid growth of the service itself.

Best of all, UBER is decidedly not politically correct. More to the point, UBER is not afraid to “gouge” its customers, and in fact, announced that it would do just that ahead of New Year’s Eve. Knowing that a high percentage of its customer base would be out on New Year’s Eve, UBER’s management properly sensed that the best way to serve the needs of its customers would be to raise its prices.

As management put it in an e-mail:

“Surge pricing will be in effect for New Year’s Eve. The price will increase in order to maximize the number of cars on the road during peak times—and automatically decrease when there are enough cars on the road.”

The dim among us would say that UBER is taking advantage of a customer base that has fallen in love with its services, but in truth UBER’s actions point to a business desperateto keep its customers. As the e-mail states clearly, the price of its car service “will increase in order to maximize the number of cars on the road during peak times.”

Rather than act foolishly while doing badly by its customers, UBER’s management is acknowledging the obvious, that demand for rides will increase dramatically on New Year’s Eve when so many people are out drinking. Since demand will increase, the best way for it to ensure that there are lots of cars ready to serve their customers is to make it clear to their drivers who work on New Year’s Eve that they’ll be well compensated. UBER customers will be “gouged”, but their odds of getting quick ride in a luxury car to their next destination are very good.

UBER has told its customers to steel themselves for minimum fares of $100 tonight. Put plainly, UBER has speculated that its happy customer base will pay more than two times what it normally does in order to be served on a high demand night.

Some reading this (including UBER customers who didn’t read the e-mail) may respond that there’s no way they’ll pay so much for a ride. If so, UBER’s speculation will be proven wrong, but even then the customer will likely win out. Indeed, if not enough customers are biting at $100 fares, it’s a good bet that UBER, ever responding to market forces, will adjust its prices on the fly to the level at which customers begin to purchase its services.

Whatever the outcome, UBER’s customers will be the winners thanks to this increasingly popular service not falling victim to the politically correct demands of the media and politicians. UBER could have done that, but if so it’s a near certainty that its utilization of false price signals would have ensured massive shortages of cars on a night when they’re much in demand. Such a move, though it might have been good PR in a media/political sense, would have been terrible for its customers, and worse, terrible for profits over the long-term.

So with the New Year’s revelry about to begin for so many, we should raise a glass to UBER for gouging its customers. They’ll have lighter wallets tomorrow, but they’ll also get where they want to go safely on a night when rides will be in short supply.

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I’m sorry – I don’t understand why you are whining about this. Gouging the public is part and parcel of every major US Airline and Hotel reservation system – why should UBER be different? Case in point was last year when the reservation system of the biggest carrier flying out of Detroit popped up a message in the middle of internet electronic booking saying I needed to call their 800 number. The HUMAN(??? – they still have those?) at the other end said that the price had just DOUBLED in the middle of my transaction and if I still wanted a ticket she could arrange it. Needless to say the answer was NO and I haven’t flown with that carrier since. So stop whining – we live in a Right to Outrageous Profit society – no one cares until the diesel runs out for the one percenter’s yachts.

It’s pretty ironic to hear complaints about the “one percenters” coming from someone booking a plane flight. Might I suggest that you wouldn’t be flying, or taking a train, or even driving a car had it not been for “one percenters” investing their fortunes in those industries. You’d be walking everywhere, although not on paved sidewalks.

You are absolutely right. Your flawless logic then dictates that those who invest their lives in a company are also entitled to compensation equivalent to their contribution. So is the union worker that tightened the wheel bolts on your car overpaid? Or the new immigrant who cleans the hospital floors entitled to a raise when you leave without an infection? Should the restaurant worker receive higher salary at noon when you and all your friends show up for lunch and expect instant service? Would you appreciate it if your local pub owner increased drink prices at “happy hour” to be able to “better serve” his clientele?

Everyone is entitled to fair compensation that reflects the value of their contribution. Success, as measured by the ability to invest a “fortune”, is not a king’s grant that endows absolute power over the serfs in the fiefdom.

Fortunately, we a have a few people like Warren Buffet and Bill Gates who realize that maybe the system doesn’t work as well as it theoretically should and are “investing” in helping those who missed the limo (or plane).

If anyone’s interested in trying UBER out they currently have a promo code for a free $10 Credit. Just use UBERSNOW10 on signup. It will obviously only put a small in a $100 minimum, but I guess anything helps… Anyway, HAPPY NEW YEAR!

You say “the best way for it to ensure that there are lots of cars ready to serve their customers is to make it clear to their drivers who work on New Year’s Eve that they’ll be well compensated. ”

Now what happens if customer demand is too low and prices have to be lowered “ on the fly”? Does management take the hit while customers pay a lower fare and drivers are still “well compensated”, or are drivers expected to bear the lower cost? I’m not clear on how this works.

I disagree with your article about the gouging part. In new york you have a variety of options to move around. If your looking for a more econmical way then you can wait in the cold for a bus or wait for the subway. But if your in the cold and you need someone reliable and efficient then you can always rely on uber. I work for a black car company. I know the drivers and ofcourse I know the customers and the companies they work for. Todays companies that use car service look for a tremondous discount. And the top forbes companies have discounts. There isnt a single bank that has no discount. The uber solution dissolves any issues with the paying customer and the driver. Many groups today have late model cars and 1998 rate books for their high upscale companies that can buy most islands in the south china seas. This is no laughing matter either. Drivers want to make a living. Uber has that kind of clients who want service and uber provides it for them at a good and fair premium. If your a driver working all day and then its 4pm and you live in queens or brooklyn. Its rush hour. You think that driver is going to spend 2 and a half hours to go from the city to jfk for 60 dollars? On top of that spend 10 dollars in gas. Get denied waiting time because most customers refuse to pay waiting time. Meanwhile the drivers base takes anywhere from a modest 15 percent to 25 percent. So the driver is left with roughly 48 dollars. Most drivers would rather just ho home those hours. But now the uber solution allows the driver to get more money and allows passengers to get to their destinations. If your a driver you dont mind going to jfk for 170 dollars and wasteing 10 dollars gas. And the kind of customers uber has are customers who demand service. Uber is a best friend to both sides.

Someone asked a very good question in an earlier comment…”what if this backfires, does the company take the hit and compensate the drivers”…the answer is a resounding “NO”. I know fir fact because Im one of the drivers in the SF market. There was no demand for Uber service and the Uber system was probably at full capacity because nearly every uber driver in the system was logged on, all thinking this was going to be a great night (much needed after an incredibly bad holiday season). It was so dead you could hear crickets. At one point surge pricing was in effect for NO REASON (using the Uber app you can clearly see how many cars populate the system and they were so deep on NYE they overlapped. There was clearly an overabundance of cars available at that time.). It still wasnt enough to mitigate the loss of revenue to any driver on duty. Most of those drivers dont own their own vehicles and have to profit share with a partner (that supposed 20% gratuity does not go to the driver at all. That and another 10-15% go directly to Uber. The remainder is split between the car owner and the driver with the full cost of gas, tolls, car washes and bottled water being placed solely upon the driver, the person making the very least in the equation).

Uber has done no marketing recently. Offered no promotions to stimulate a dead business in a major metropolitan area (their HQ no less). Either morons run the show or this business model has run its course and they are just milking the last few dollars out of it. At the end of the day, its just an app and no app keeps its novelty for too long.